Michael T. Kiley
Abstract: Consumption growth is predictable, a basic violation of the permanent-income hypothesis. This paper examines three possible explanations: rule-of-thumb behavior, in which households allow consumption to track per-period income flows rather than permanent income; habit persistence; and non-separability in preferences over consumption and leisure. The data appear most consistent with non-separable preferences over consumption and leisure.
Keywords: Habit persistence, inattention, excess sensitivity, excess smoothnessFull paper (152 KB PDF) | Full paper (Screen Reader Version)